Why Trouble in Iran May Trigger Higher Oil Prices

Protests in the streets of Iran could not come at a worse time for the regime as President Trump must decide again whether to waive US sanctions on Iran’s oil exports by a January 12 statutory deadline.

Renewed US sanctions would not only result in an oil price spike by removing nearly 1 million barrels per day of Iranian crude exports from global markets, but would likely cause the entire nuclear deal to unravel.

In a December 21 client note, we said that “we believed there is an increased likelihood that Trump will not issue another oil sanctions waiver.” While Trump has reluctantly issued prior sanctions waivers on May 18 and September 14, those deadlines occurred before the President decertified the Iran Nuclear Deal on October 13.

The protests began after our December note but we think they only increase the odds that Trump doesn't waive sanctions again.

In our December 21 note, we suggested to look for Trump tweets in the following weeks on Iran as a risk indicator of the sanctions waiver decision. Trump started the New Year with some tough talk on Iran and the Obama nuclear deal once again calling it a “terrible deal” that “All of the money that President Obama so foolishly gave them went into terrorism and into their [the regime’s] ‘pockets.’”

See Trump’s relevant tweets from this morning and January 1 below.

Some of Trump’s advisers want him to waive sanctions again and give more time for a legislative fix or diplomatic fix working with EU but Trump has his own views as we saw with the decertification in October. Trump has grown impatient with the lack of progress on the legislative and diplomatic fronts since he decertified the deal.

The protests make it hard to keep the status quo on Iran as the January 12 date approaches.

There are also advisers on the Trump national security team, as well as in the US foreign policy community, arguing that US action here (not waiving sanctions) may provoke or help the hardliners in Iran. But we believe Trump views those arguments as lacking validity as he sees the hardliners and the current regime as one in the same.

Another possible alternative to denying the sanction waivers is to decertify the deal again on the January 13 deadline (every 90 days). We think another decertification decision is already expected but wouldn’t have any real impact on sanctions. It would however restart the legislative clock again for a legislative fix and potentially offer public relations value to slam the regime amidst the protests. If he goes this route, it would set up a real showdown for the next sanctions waiver deadline in May.

While we are not sure Trump is patient enough to allow another two months for the “terrible deal” to be fixed, we are quite certain he will not agree to waive sanctions again without a fix when the next waiver deadline arrives on May 12. Another decertification on January 13 may be the last chance to salvage the Iran deal.

We think the Iran nuclear deal and US waivers of oil sanctions are on life support.

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